By David Parker, Esq.
QUESTION: I have just signed a contract to buy a new house and now I must select a Lender and a Settlement Attorney. My agent suggests that I go to a lender and title company that are “affiliated” with the real estate agents company. I am not sure if I will get the best deal if I go to one of these affiliated companies and also whether those companies are the best ones out there. Shouldn’t I shop around for the best service, experience and best prices or should I just go with the affiliated companies?
ANSWER: The easy answer is that of course, you should definitely shop around for the company that is the most experienced, excels in customer service and also has fair and reasonable prices. Buying a house is probably the single largest purchase you will ever make. Perhaps the most important factors in selecting a settlement attorney (and for that matter, a lender) are how experienced is the settlement attorney, what is their reputation in the real estate community, are their fees fair and reasonable, and are they diligent in taking and returning phone calls.
That having been said, some real estate companies have formed joint ventures or affiliated business arrangements wherein the owners or the real estate company have entered into a business relationship with the owners of a title company and/or a lender. This so called “one stop shopping” concept is supposed to make the settlement transaction easier for the buyer, and, in theory, make the transaction a bit cheaper. Quite frankly, the best way to find out of the affiliated company is cheaper is to shop around and speak to three or four title companies and compare fees. While you are talking to the different companies, you will get a sense of their customer service, as well. You should check their websites and marketing materials to get an idea of whether they are experienced attorneys who run the operation, or whether they are simply title clerks who conduct the settlements.
You should understand that under Federal law, it is strictly prohibited for a realtor to receive any fee, kickback or thing of value in exchange for the referral of business to the settlement company. For example, it is illegal for a title clerk or settlement company to pay a real estate agent $100 for every settlement that is referred to the settlement company. Believe it or not, there still exist circumstances where such payments, gifts or other benefits are being made.
The Federal law governing these type of cases, the Real Estate Settlement Procedures Act (RESPA) does allow for affiliated business arrangements. However, the law requires that the purchaser/consumer must be given written notice of this relationship, the purchaser can NOT BE REQUIRED TO USED THE RELATED BUSINESS, and payments between the real estate company and the title company must be based on an actual return on the ownership investment or profits of the entity. In other words, any payments made by the settlement company that vary based on the number of referrals, past or present, would be illegal. All things being equal, owners who refer more settlements should not get more “profits.”
What we are finding in the real estate world is that many of these joint ventures are not set up properly and are, in fact, “sham” business arrangements set up to funnel money from the title company to the realtors company. The Federal government has been policing these relationships carefully and has found many to be legally inadequate to satisfy the rules established in order to avoid illegal kickbacks. Investigators look at the amount of money that each “owner” of the entity has invested, whether the affiliated business entity has its own employees, does the entity have its own separate location so that the public can clearly identify the entity and who is providing the actual settlement services.
What the Federal government often finds is that the affiliated business entity is not a separate business, but rather an existing settlement company that has joined forces with an existing real estate company. Some form of payment is then made to the real estate company in exchange for the settlement referrals. In reality, the real estate company has absolutely no involvement in the running of the title company, and vice versa. Many fines have been issued in recent years as the Department of Housing and Urban Development has increased its enforcement of the anti-kickback laws.
Whether you should work with your real estate agent’s affiliated company, or with a truly independent company is your decision to make. However, to the extent that you can investigate the knowledge, experience, pricing and service of several companies, you will be in a better position to make a decision. Many have argued that having a truly independent attorney conduct your settlement has its advantages over a title clerk who only wants to keep her joint venture partner happy. There may be some truth to that argument. But ultimately, the decision is and should be made by you and you alone.